Cyprus has already incorporated the anti-avoidance provisions of the new EU Parent Subsidiary Directive into domestic law, giving the tax authorities power to disregard artificial or fictitious transactions and to withhold the corporate tax exemption on dividends received by companies in Cyprus from elsewhere in the EU if the dividend is treated as a tax-deductible expense in the accounts of company paying it (so-called “hybrid mismatches”).
Like all other EU member-states Cyprus will also be required to adopt the EU Anti-Tax Avoidance Directive (ATAD) by 1 January 2019. ATAD combats abusive tax practices in the field of corporate taxation and contains rules aimed at addressing some of the practices most commonly used by large companies to reduce their tax liability, including:
⦁ a controlled foreign company (CFC) rule to deter profit shifting to low tax jurisdictions;
⦁ an exit tax to prevent tax avoidance;
⦁ an interest expense limitation;
⦁ a broadly worded anti avoidance rule; and
⦁ a rule targeting hybrid mismatches among member states. A future version of ATAD is expected to extend the rule to hybrid mismatches with non-EU countries.
These developments confirm Cyprus’s reputation as a reliable, reputable international business center and go hand in hand with its efforts to become a jurisdiction of substance. Nevertheless, Cyprus still offers a wide range of tax and non-tax advantages. With proper planning and advice, a combination of such benefits will continue to be available for foreign investors and taxpayers.